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Analysts see a gathering of clouds on the horizon

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Shortages of polysilicon have plagued the solar market since 2005 but that's about to change, given that more than 130 projects are in the planning or construction stages. Most analysts feel that with so many projects in the pipeline, shortages will ease this year and next and the market will swing to oversupply in 2010 or so.

Ingo Queiser, a solar analyst with European investment bank Landsbanki Kepler, has a different view. There's no question that more polysilicon supply will soon hit the market, Queiser said, but he's doubtful that many of the projects will make it online without significant delays and start-up glitches, given that so many are being built by companies not experienced in silicon technologies.

"Historically, we had five or six established silicon producers," Queiser said in a telephone interview from Frankfurt, Germany. "Meanwhile, fat margins have attracted new entrants that probably number 100, and the count goes up as you add the non-credible projects. I do not believe in the capacity announcements these guys are giving out because they want to ramp production up within two or three years, and that would be as fast as the established players."

The production process for polysilicon is complicated and procuring the necessary equipment is difficult, Queiser said. "Most of the new players want to use a chemical purification process, and that is very tricky."

Queiser estimates that as much as 400,000 tonnes of new polysilicon capacity has been announced—a highly ambitious figure considering that only 50,000 tonnes was produced last year.

Citi Investment Research analyst Timothy Arcuri, based in San Francisco, agrees that some projects will fail to come online as planned. But "even if you take what some of these guys say at a significantly discounted face value, you still have a significant oversupply problem in 2010. The sheer volume of what's being announced is so big, I think you will have double the amount of product by 2010 vs. what demand will be," he said.

The increase in polysilicon output will have an immediate impact on the supply of solar cells and modules, as cell producers are running at only 50 percent of capacity due to a silicon shortage, Arcuri said. "A near-certainty for me is pricing is going to come down a lot faster than people think over the next two years for solar modules."

For example, in a research report Arcuri estimates that prices should start to decline 10 to 20 percent in 2009 and accelerate in 2010. He attributes this partially to a dislocation due to lower European subsidies. "This is apt to result in lower prices or lower demand. This should be exacerbated by surging cell supply as we see a slightly tighter cell supply/demand balance in 2008 giving way to significant increases in cell supply in 2009 and 2010 such that it looks set to exceed demand by more than 60 percent in 2009 and about 100 percent in 2010," he said in the report.

For Arcuri, the bigger question is on the demand side. "There's a certain price-demand elasticity in solar that we really do not know yet," he said, in part because a lot of the demand for solar cells is artificially driven by government subsidies. Supply will eventually balance out with demand as prices for modules drops, Arcuri said, but consumption levels are at risk from countries that might scale back their subsidy programs further.

Queiser, meanwhile, suggests that too many market followers are underestimating the impact of a shortage in silicon metal feedstock, which is produced in a furnace process similar to steelmaking. "I am of the strong opinion that this is the next bottleneck," he said. "The silicon metal industry has gone through many years of crisis, margins are very thin and they have no interest to add capacity. And even if they did start to do so, it would take two years anyway. In the meantime, we would have run into a massive shortage because the solar silicon refiners are preparing for a massive capacity expansion and they will need a lot more silicon metal."

According to a recent Lux Research report, the shortage of solar modules will end in 2009, when demand for solar installations will reach 8.96 gigawatts but supply reaches 9.57 gigawatts. It predicts that oversupply will persist through 2012, when installation demand will reach 20.3 gigawatts vs. supply of 21.2 gigawatts.

Analysts also note that rival technologies, such as thin-film panels, are coming to market that won't require silicon. That could contribute to oversupply.

Photovoltaic panels that use refined crystalline silicon make up about 90 percent of sales in the industry today, but Arcuri said thin-film panels will soon grab considerable market share. "Silicon will still be used in markets that will require characteristics that thin film cannot meet," he said, "but the broad utility-scale stuff that's sitting in fields, will virtually all become thin film."

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